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CCH® BENEFITS — 12/19/07

Lawsuits Claim That PBMs Violate Their Fiduciary Duties To Clients, Members

From Spencer's Benefits Reports: Pharmacy benefit managers’ (PBMs) practices have been under scrutiny in the past few years, and a number of lawsuits have been filed against several major PBMs, including Medco (formerly Merck-Medco Managed Care), Caremark, and Express Scripts.

Health care plan sponsors contract with PBMs to manage the plans’ prescription drug benefits and control costs. However, plan discovered that PBMs have raised plan costs by promoting use of drugs that are more expensive and not necessarily the best for patients in exchange for drugmaker rebates that are not passed on to plan sponsors or patients. Some lawsuits claim that PBMs have ERISA fiduciary responsibilities. ERISA specifies that if an entity manages benefits, it is a fiduciary, explained David A. McKay, an attorney with the law firm of Herman, Mathis, Casey, Kitchens & Gerel, LLP, at the first annual Pharmacy Benefit Information and Knowledge Exchange conference held in October. Three attorneys discussed recent cases against PBMs.

In one of the first lawsuits, United States v. Merck-Medco Managed Care,LLC, the federal government alleged that Medco had defrauded it while managing prescription drug benefits for the Blue Cross and Blue Shield Association plans, which provided health care coverage to federal employees. The government also maintained that Medco had made and received payments for favorable treatment with other companies and health care plans. State governments also sued Medco, and, in exchange for settling the case, Medco paid approximately $29 million to 20 state governments and approximately $155 million to the federal government. The settlement included a corporate integrity agreement, which addressed transparency issues, explained David Stone, an attorney with the law firm of Boies, Schiller & Flexner LLP. The agreement requires Medco to report all agreements with drugmakers (including any compensation); with PBM clients; and with agents, as well as to submit to audits and reviews.

Express Scripts Suits

Express Scripts also is involved in several lawsuits affecting employer plans. No settlements had been reached at the time of the conference. One major lawsuit pending against Express Scripts was brought on behalf of participants of any employer-provided prescription benefit plan that required participants to pay a percentage copayment for prescription drugs and for which Express Scripts was the provider. This action was brought under ERISA and claims that Express Scripts breached its fiduciary duties to plan participants and beneficiaries in several ways. The lawsuit seeks “declaratory and injunctive relief” and a court order requiring Express Scripts to account for and to reimburse consumers and benefit plans for all monies that the PBM earned through allegedly unlawful activities. The plaintiffs claim that Express Scripts does not disclose to plan administrators at what rate it purchases drugs and sets a price “spread” between the cost it actually pays and the amount that the client plan contracts to reimburse Express Scripts, and that the PBM does not disclose the resulting profits.

Specifically, the lawsuit claims that Express Scripts had a duty to provide clients with the most cost-effective drugs, but that the PBM often determined which drug to offer based on how much money it can gain from drugmaker rebates, kickbacks, and other incentives; as well as from mail-order discounts. The suit further claims that Express Scripts did not pass on any savings or financial returns to the plans it manages. Furthermore, the plaintiffs claim that in response to financial incentives from drugmakers, Express Scripts often purchased more expensive drugs. According to the lawsuit, these actions are a breach of Express Scripts’ duty to act according to the sole interest of its customers, not its own interest.

The state of New York also has sued Express Scripts, alleging that the company conducted an elaborate scheme that inflated by millions of dollars the costs of prescription drugs dispensed to the state’s largest employee health care plan, the Empire Plan. The charges against Express Scripts include inducing physicians to switch a patient’s prescription from one prescribed drug to another for which Express Scripts received money from the second drug’s manufacturer. The lawsuit also alleges that the drug switches that Express Scripts initiated often resulted in higher costs for plans and members.

“This is a startling amount of litigation for an industry that claims to help plans save money,” remarked W. Scott Simmer, an attorney with the firm Robins, Kaplan, Miller, & Ciresi, LLP. “Conflicts of interest abound in the industry,” he warned. Plan sponsors should ensure that the PBM has disclosed its pricing terms and that the sponsor retains specific rights in the contract with the PBM to audit the PBM with the sponsor’s own auditor and under the plan’s terms, not those of the PBM. “If the PBM fights the plan sponsor on audits, the sponsor should run the other way,” Mr. Simmer urged. “Do not use the PBM’s contract template, draft your own with guidance of an experienced, qualified attorney, and ensure that all terms (such as ‘rebate’) are clearly defined.” He also urged plan sponsors to obtain from the PBM its source for pricing. Prescription drug plan data belong to the client and the clients ought to be able to determine what the PBM is paying pharmacies for drugs and compare those figures with what the PBM charged the client, Mr. Simmer concluded.